Making Dollars & Sense of Capital Equipment Investments

Today's market is saturated with capital equipment investment dollars from lenders that may not have expertise in the specific sectors in which they're lending. And while the access to capital is a boon from a low interest rate perspective, the lack of industry expertise and understanding of a business can result in onerous lending terms when the market retreats. In this week's Point of View, I present several considerations middle market businesses should take into account when choosing capital finance partners.

Due to today's positive market conditions, a wide variety of lenders can offer low rates without necessarily offering deep experience lending within a business' particular industry. This lack of expertise can cause friction when a sector goes through a natural cycle. A lender may try to impose harsh terms, underscoring a lack of knowledge about the industry and the business' ability to operate in a natural downturn, which ultimately put the business at risk.

Search for lenders that have industry expertise - Corporate borrowers should construct bids that will attract lenders with a depth of experience in their respective sectors. It's much easier to deal with a lender that understands your business and its natural cycles. In the auto manufacturing industry, there is a difference between being a sole source provider to an OEM versus a provider after-market parts for used vehicles. In the Media and Broadcast industry, there are assets that companies acquire that have varying degrees of technological improvement or maybe even obsolescence. Not all industries are the same and not all equipment that is purchased within an industry depreciates at the same rate.

Place a premium on tailored solutions - A lender should thoroughly understand the company's business model, industry situation and the lifecycle of the specific equipment. By understanding the above, a lender can create a more tailored solution that can better weather bumps in the road. To a Treasurer or CFO in the food industry, it's important for a business partner to understand the differences between organic and non-organic production. It might even be more beneficial for that financing partner to be aware of that drought that drove higher grain prices which ultimately impacted their margins.

Think past the short term - The lender that offers you a low interest rate today may not be suitable when the market turns. New deal terms may put stress on liquidity, ultimately jeopardizing a business' strength. How is your lender going to treat you during your next industry down cycle? Are they going to understand the particular challenges that you are facing or are they simply going to apply unnecessary pressure on you that is going to force you to make a bad or costly business decision?

Lastly, middle market businesses seeking capital finance partners should consider the product variation being offered as all lenders are not created equal and do not offer the same breadth of financing products. Is your lender offering you the product that is best for your business or best for them? My suggestion is to choose a lender that is able to provide a custom tailored solution to your individual need. Or one that provides you with alternative structures that can provide different financial impacts.

Eric Miller is Group Head and Managing Director of
CIT Capital Equipment Finance where he is responsible for overseeing financing activities for large ticket equipment leasing and lending, as well as project finance related activities. To view more observations presented by Miller, go to
"Capital Equipment Finance: The Lifeblood of Growth," the latest piece of market intelligence in the CIT Executive Insights video series.

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